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Fitch Affirms PAE LLC's Foreign Currency IDR at 'BB'; Outlook Stable
CHICAGO-(Business Wire)-October 3, 2008 - Fitch Ratings has affirmed the Foreign Currency Issuer Default Rating (IDR) and the Local Currency IDR for Pan American Energy LLC (PAE LLC) at 'BB' and 'BB+', respectively. Also, PAE LLC's senior unsecured debt was affirmed at 'BB'. Approximately $350 million of local and international bonds are affected. The Rating Outlook is Stable.
Pan American Energy LLC's (PAE LLC) ratings are supported by the company's long-lived reserve base, modest debt levels and its ability to maintain up to 70% of its export proceeds abroad. The two-notch foreign currency IDR above the country ceiling of Argentina is supported by PAE LLC's reliable strong internal cash flow generation, high level of dollar-denominated revenues from exports relative to total debt, its ability to maintain a material amount of export revenues offshore, and the company's track record of payment during stressed sovereign scenarios.
Operational strengths lie in the company's leading position in the Argentine upstream business, high reserve replacement ratio, competitive production costs and strong production growth prospects. A prudent financial strategy reflects a conservative capital structure, with average gearing below its peers. The ratings incorporate the potential for additional debt to finance PAE LLC's aggressive capital expenditure program that supports healthy production growth forecasts. The Stable Outlook reflects the expectation that the increase in leverage will not prevent PAE LLC from maintaining solid credit metrics.
Total debt-to-capitalization is expected to remain below 35%, consistent with its rating category. For the latest 12 months (LTM) ending March 31, 2008, EBITDA was USD1.4 billion compared to USD1.1 billion in 2005, an EBITDA margin of 48%. EBITDA-to-interest coverage remained sound at 16.4 times (x) and EBITDA-to-net-debt at 0.8x. However, credit metrics will remain exposed to local inflation and the impact of government intervention in the hydrocarbon sector.
Offsetting factors to the ratings include geographic concentration, the company's negative free cash flows, upstream exposure and Argentine operational risks. Free cash flow remains negative, as PAE LLC's capital expenditures and dividend payments exceed cash flow from operations. Export revenues from Argentina represented approximately USD1.2 billion in 2007, accounting for 46% of consolidated sales. This, coupled with its right to maintain offshore up to 70% of export-related revenues, mitigates the risks associated with having the majority of its assets and cash-generating activities concentrated in Argentina. PAE LLC has a flawless record of meeting its own debt services, even during periods of sovereign defaults and exchange controls. At March 2008 exports were equivalent to net debt.
At March 31, 2008, PAE LLC's consolidated debt amounted to USD1.5 billion up from USD1 billion in 2006, but remained at conservative gearing levels (debt-to-capitalization at 26% and total debt-to-EBITDA at 1.1x). Core borrowing facilities are generally held at the Argentine Branch level which accounts for almost USD1.4 million of total debt.
In March 2008 consolidated liquidity was USD299 million of which 67% was located in the Argentine Branch. Most of the liquidity is dollar denominated and located abroad. To support its liquidity, at March 2008 the Argentine Branch had unused uncommitted credit facilities for approximately USD180 million. PAE LLC has demonstrated its ability to access financial markets and refinance outstanding debt, which has been supported by a combination of a conservative capital structure, increasing levels of cash generation, and a manageable debt amortization schedule.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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